Only bold measures will fix economy

Only bold measures will fix economy

In his maiden budget speech of 2017/18 the Minister of Finance’s theme was ‘’pursuing financial sustainability within the context of political instability and insecurity’’. This year’s theme is ‘’Pursuing job creation and restoring fiscal stability and sustainability (through the consolidation of peace and stability).
What is common about th

ese themes is that the Minister is pursuing fiscal consolidation while creating jobs against the backdrop of a very challenging political and security situation. Pursuing anything is not an event but a process. While on the one hand I would wish the Minister a speedy success in his endeavours, on the other hand I don’t think it is going to be easy. The current budget bears testimony.

Let me briefly put the socio-economic situation in perspective. Lesotho faces daunting problems. Despite having recently celebrated fifty years of its independence the country has hardly changed. It is still characterised by endemic poverty. Since 1990 when the report was first published, Lesotho has systematically been in the lowest quartile of the World Bank Human Development Report.

In 2016 it ranked 160 out 188 countries. According to the UNDP Lesotho Country Analysis Report of 2017, 34% of the population lives below the food poverty line of M138.0 per month. The number of people who live in abject poverty increased from 29% in 2003 to 35% in 2015.
Chronic food insufficiency and hunger are a common phenomenon in Lesotho, especially in rural areas. 33% of children under the age of 5 are stunted while 3% suffer from acute malnutrition. As for income inequality Lesotho ranks among the top ten most unequal countries in Sub-Saharan Africa.
The unemployment rate in Lesotho is claimed to be as high as 40% compared with the formal rate of 25%. Youth unemployment accounts for 40% of the total unemployed population.

Although 70% of the population live in rural areas and subsist on farming, the agricultural sector has declined from 20% to only 7% between 1980 and 2017 in terms of its contribution to total output. This precipitous fall not only demonstrates lack of skill and continued use of outmoded technology but also the changing climatic conditions that have left the rural masses in a quandary while facing state policy paralysis.

The above narrative is not intentioned to portray a hopeless and gloomy case, be it as it may. On the contrary, it is purposed to elucidate facts that probably can galvanise the entire nation into action to urgently do something about the state of the economy.
It is also aimed at juxtaposing government plans and activities on the ground with the abovementioned challenges in order to ascertain its commitment and appreciation of the severity of the problem.

One such very important plan is the annual fiscal budget which government prepares and submits to parliament every year. The purpose of this article is to analyse this year’s budget premised on the challenges above. From the outset it has to be mentioned that this was a budget of high expectations mainly inspired by the hard hitting truths told in last year’s budget. While it can be correctly assumed that last year’s budget was not adequately thought through as the Honourable Minister had just assumed office, at least he was able to articulate some of the glaring weaknesses in the economy and its financial performance.

In his speech the Minister in plain language told the nation that government cannot generate adequate revenue, expenditure was hitting the roof fuelled among others by the out of control wage bill, and that SACU revenues were in free fall.

All these summed up to one conclusion – government’s fiscal space had reached a critical point. Fiscal space is defined as a point at which a country’s fiscal solvency is called into question. In the light of this dire situation the Minister called for a major fiscal consolidation.
Now that the Minister in the last eight months has had some time to appreciate “more deeply the dire straits our country and economy are mired in” I expected the 2018/19 budget to be the budget of reckoning that sets the stage for real fiscal consolidation.

The call for fiscal austerity is not new. In its report of February 2016 that pulled no punches, the IMF warned government about its expenditures that had reached 60% of GDP, government wage bill that had risen to 23% of GDP and being the highest in Sub-Saharan Africa, declining and volatile customs revenues, contracting foreign reserves that threatened maloti/rand parity, declining support from development partners, and the unabating political tensions.

No one heeded the IMF’s clarion call and these problems still persist to date. However, in his budget speech the Minister makes a very strong warning that it’s now time “to bite the bullet and make decisions that would be painful” and which if not taken can impose political and economic chaos on Lesotho.

This is the right call but I think the budget falls far short of what would be expected given the nature of the crisis. It does not set the right tone for financial discipline that would include economic growth.
First and most important, government expenditure has hardly changed from its level last year. Under normal circumstances when revenue falls expenditure has to follow suit to maintain a balanced budget. Failure to do so can either lead to increased borrowing, depletion of reserves, and/or sale of assets. As a least developed country (LDC), when it comes to external borrowing Lesotho is not creditworthy in world capital markets.
It can only borrow from multilateral institutions using their soft loan windows. At the World Bank Lesotho secures its loans through the International Development Agency (IDA) while at the African Development Bank it can only access African Development Fund (ADF) or the Nigerian Fund.
These facilities are mainly funded by developed countries and although cheap come with stringent terms and conditions that hinge primarily on strong public financial management, good governance, and political stability.

Lesotho faces some serious challenges on all the three most critical requirements and this can compromise its ability to access more cheap loans. The former president of Zimbabwe had to resort to China when the going got tough! Another alternative for deficit financing is domestic borrowing.
Domestic banks are cash flush and ironically invest most of their funds abroad as they claim lack of bankable projects in Lesotho. The challenge here is for government to ensure that it utilises the resources sourced from local banks on projects that crowd-in the private sector and not crowd it out.
The reason that government expenditure is incompressible in Lesotho is mainly because of two things, political pressure and weak institutional pillars of government. These two need to be addressed with immediate effect. That whoever is in power has had undue influence on the allocation of resources in Lesotho is not a debatable.

Diabolical laws have been passed that benefit only the elite class (executive, legislature and senior public servants). This has not only led to increasing budgets but it has also widened the chasm between the haves and have-nots and the now seemingly deepening social discontent. It has become common practice in Lesotho, especially with the recent coalition governments, to employ their supporters without due regard to civil service code.
The security sector has also notoriously become a convenient channel through which to employ mainly their unskilled party supporters.

As for weak institutional pillars there is none as important as the public finance management (PFM) system. From time immemorial Lesotho’s PFM has been riddled with problems of funds leakage, theft and fraud. At heavy expense the system has many times been reviewed and upgraded but the problem persists.

Even now the Minister talks about a new IFMIS system that will be introduced in April next year. The procurement system seems to be the main culprit in siphoning proceeds of fraud and theft.
The Minister says laws exist presumably to govern the system and this year he will introduce yet another new legislation. My impression is that the problem is not the law but poor execution of the law which itself seems to be a people-related problem. Perhaps that is where the solution needs to be found.

I welcome the clustering approach of ministries to address their problem of working in silos and competing with each other and hope this will leverage efficiencies. However, instead of addressing the problem piece-meal, I would advise the Minister to comprehensively review the current PMS in accordance with the following principles and where there are gaps to act accordingly:

l Ensure that levels of revenue collection and public spending are consistent with each other

l Ensure that public resources are allocated in accordance with agreed strategic priorities – immediately review and reduce non-strategic non-discretionary recurrent expenditure, the wage bill should top the list

l Ensure maximum value in the delivery of services – See to it that ministries improve their operational efficiency

l Avoid leakages and wastage in the use of resources through well-defined checks and balances – improve and insist on accountability

l Ensure that audit and other financial reports are disclosed to the public – to enhance public trust and transparency.

On the revenue side it is quite clear that the LRA could have reached a point where according to the Laffer curve theory, the economy due to poor growth, could have reached a point where no additional tax can be collected without doing harm to the economy.
That LRA has not been meeting its targets could only be due to compliance weaknesses and internal inefficiencies that need to be urgently addressed. At 22% of GDP, the 2018/19 tax revenue is less than the 2017/18 budget of 23.1% but more than its expected turnout of 19.5%. With tax revenue struggling, the only hope could be customs revenue.

According to this year’s budget customs revenue is expected to fall by a whopping M616 million or 10%. This poses a very big problem as the Minister has to resort to borrowing or continue to deplete reserves. I would strongly urge the Minister that whatever new borrowing is contracted, either domestic or external, should not be spent on consumption expenditure.

The only choice remaining for government is to bite the bullet on the expenditure side and the Minister should see to it that everyone in government toes the line. At the present moment the signals coming from government are very confusing in terms of reining in the runaway expenditure and inculcating a culture of financial discipline by the minister is not an option.

As for the volatility and unpredictability of customs revenue, the IMF has advised government to adopt a rule based fiscal policy. Such policy should be aimed at mitigating the pro-cyclical nature of customs revenue. Botswana has already adopted that approach.
Further, there is a cloud hanging over the future of SACU as a regional trade bloc but strange enough all BLNS countries are keeping mum about it.

This presents a very serious risk for smaller countries like Lesotho whose reliance on this source of income and its importance cannot be over-emphasised. Given its vulnerable position, Lesotho has to be more proactive to stablish certainty.
While I generally agree with the Minister’s choice of strategic and priority sectors which are informed by the NSDP, I would also advise that this strategic focus be aligned to the SADC Strategy for Economic Transformation – Leveraging the Region’s Diverse Resources for Sustainable Economic and Social Development through Beneficiation and Value Addition (SSET).

The SSET is aligned to the African Union Agenda 2063 and is a compilation of national policies including Lesotho. Linking the development of our strategic sectors with the regional strategy could leverage the critically needed resources and technical assistance.
Unlike the usual generic strategies, the SSET is sector-oriented and is designed as a modernization scheme, predicated on maximum exploitation of comparative advantages and creation of enduring conditions for competitive advantage at enterprise level.

On sector specific issues, while the Minister clearly enunciated programmes to be undertaken under the Ministry of Health he has however eschewed, perhaps inadvertently, the controversial Tšepong Hospital conundrum.
There is a loud public outcry that Tšepong does not meet one of the criteria mentioned above, that of delivering value for money. The facility is excessively expensive and gobbles up more than 50% of the ministry’s budget.

As much as it is one of the expenditure items that will be categorised under non-discretionary expenses because it is contractual, I would hurriedly insist that contracts are not cast in stone. The Minister should urgently put in motion a process of reviewing or renegotiating the contract in order to reduce or eliminate the dastardly waste of public funds.

The social sectors namely, education, health and social development together account for 48% of the total budget. What is disconcerting about these sectors is that while they consume a good part of the annual budgets their productivity is very low as demonstrated by their poor quality of service and social impact.  According to the Auditor General’s financial reports and Parliament’s Public Accounts Committee representations it is now common cause for ministries of health and education to be interrogated for misappropriation of funds and yet there has been no improvement to date.

The 4% total allocation for agriculture is indeed very low. What is strange is that it is exceeded by 4.4% all recurrent expenditure allocated to defence and security. This flies in the face of one of the PFM principles I mentioned earlier – strategic priorities.

My only assumption is that this could be a once-off spike due to reforms within that sector. Going forward the agricultural sector should be strategically viewed from the stand-point of food security and commercial farming. The Minister in his speech has only referred to the latter.
On food security I would urge government to ditch the current block-farming approach as it has been an utter waste of scarce national resources. Alternative efficient and effective mechanisms should be devised.

In conclusion I would urge government to do more than what the budget offers. If there is a crisis, commensurate remedial measures have to be taken. Urgently and effectively embark on fiscal consolidation. Cut consumption expenditure. Stop depleting reserves.
Utilise new borrowing on priority sectors and projects that crowd-in the private sector not consumption. Review the civil service structure and payroll with the objective of enhancing efficiency on service delivery and trimming flab.

Review and reform all state-owned enterprises in terms of their mandates, relevance and social value. Review the country’s legislature perquisites and lastly the size of the nation’s cabinet in terms of affordability and net social benefit respectively.

This is not going to be an easy ride as mentioned above. However, the so-called 4×4 coalition government must at all times remember that first and foremost, it faces an unenviable and formidable task of correcting the past mistakes and putting the economy on its right footing.
The hype on institutional reforms is good but is more of a means than an end. The end is economic growth and development. People want jobs and economic opportunities. Stop sending the wrong signals.  Failure to deliver on these expectations could have devastating consequences as rightfully alluded to by the Minister.

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